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42) The first step in materials requirements planning is establishing the:
A) desired minimum raw materials inventory level.
B) finished goods inventory level.
C) cost of each order.
D) delivery time required for each type of raw material.
E) value of each inventory item as a percent of total inventory.
43) For a JIT inventory system to be efficient, the:
A) inventory must have an independent demand.
B) firm's suppliers need to be able to deliver goods quickly upon order.
C) managers must limit production each day to a set quantity.
D) firm must be a reseller of goods, not a manufacturer.
E) supplying firm must be a subsidiary of the ordering firm.
44) Crocket Motors has an account receivable balance of $682,400 and the average collection
period is 38 days. What are the firm's credit sales per day?
A) $17,957.89
B) $23,333.33
C) $71,044.38
D) $259,312.00
E) $236,408.11
45) Delta Distributors has accounts receivable of $2,750,000 and average daily credit sales of
$118,280. The firm offers credit terms of 2/10, net 30. On average, what is the firm's accounts
receivable period?
A) 19.47 days
B) 23.25 days
C) 37.14 days
D) 20.00 days
E) 18.64 days
46) If 34 percent of customers pay on Day 10 and the remainder pay in an average of 28 days,
what is the average collection period?
A) 19.72 days
B) 20.08 days
C) 21.88 days
D) 18.47 days
E) 22.09 days
47) Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net 30. What is
the cost of credit to the customer if they pay on the last day of the credit period? Assume a 365-
day year.
A) 41.02 percent
B) 39.62 percent
C) 37.80 percent
D) 37.56 percent
E) 39.40 percent
48) Jaxon Markets currently has credit terms of net 30, an average collection period of 29 days,
and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30
that 45 percent of its customers would pay on Day 10 with the remainder paying on average in
32 days. How much cash could the company free up from its accounts receivables if it switched
its credit policy?
A) $38,762
B) $50,301
C) $64,219
D) $58,336
E) $65,009
49) Yesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice was sent
today with the terms, 3/10 net 40. This customer normally pays on the net date. What is the
effective rate of interest the customer is paying by not taking the discount? Assume a 365-day
year.
A) 42.31 percent
B) 44.86 percent
C) 39.27 percent
D) 40.54 percent
E) 45.38 percent
50) Edgeworth Co. has an all-cash policy and sells 50 units per month at $920 a unit. The
variable cost is $700 a unit. Should the firm grant 30 days of credit, it expects its sales would rise
to 60 units without changes to price or costs per unit. The monthly required return is .75 percent.
What is the NPV of switching to a credit policy?
A) $266,667
B) $346,333
C) $366,667
D) $240,333
E) $258,778
51) Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a pound. The
variable cost per pound is $2.22. Currently, the firm has a cash-only sales policy. The firm is
considering changing to a net 30 credit policy. The monthly required return is 1.2 percent. What
does the new level of sales need to be to break even on the switch?
A) 3,219.40 pounds
B) 3,489.67 pounds
C) 3,370.44 pounds
D) 170.44 pounds
E) 119.40 pounds
52) Lewis Companies sells 2,600 units a month for cash at a price of $299 a unit and a variable
cost of $187 a unit. The firm estimates it can increase its sales by 200 units a month if it switches
to a net 30 credit policy while keeping its price and costs at their current levels. If the monthly
cost of capital is .85 percent, what is the NPV of switching?
A) $1,590,005
B) $1,394,008
C) $1,211,036
D) $1,820,494
E) $2,006,413
53) Underwood United has been approached by a new customer who has asked the firm to
extend credit for 30 days on a one-time purchase of $499. The firm's required return on
receivables is 1.8 percent per month and the variable cost of the desired item is $327. What is the
NPV of granting credit if the firm estimates the probability of default is 15 percent?
A) $62.93
B) $108.40
C) $89.65
D) $94.15
E) $76.67
54) Alexander Moore & Co. is willing to offer credit on a one-time purchase provided the NPV
of the transaction is at least $50 at a required monthly return of 2 percent. Assume a potential
sale has a sales price of $248 and a variable cost of $164. What is the maximum probability of
default that will result in an acceptable offer?
A) 32.55 percent
B) 29.62 percent
C) 11.98 percent
D) 10.02 percent
E) 18.50 percent
55) A&M Hardware assumes new customers will default 8 percent of the time but if they don't
default, they will become repeat customers who always pay their bills. Assume the average sale
is $383 with a variable cost of $260, and a monthly required return of 1.65 percent. What is the
NPV of extending credit for one month to a new customer?
A) $5,589.09
B) $6,103.47
C) $6,598.18
D) $5,748.09
E) $6,858.18
56) Neilson's is a new firm that sells a product with a variable cost of $62 a unit. The firm has a
monthly required return of 1.8 percent. The firm wants to offer all new customers 30 days of
credit and expects that if it does so, that 12 percent will default on payment while the others
become repeat customers. What is the minimum price the firm could charge to break-even on an
NPV basis?
A) $82.15
B) $74.09
C) $63.27
D) $98.14
E) $78.40
57) Sisler's sells 382,000 units a year and orders 10,000 units at a time. The cost of placing an
order is $24.90. What is the firm's annual total restocking cost?
A) $909.09
B) $984.23
C) $951.18
D) $1,023.02
E) $811.19
58) Jensen's Boat Works total costs of holding inventory is $8,400 when its order sizes are
optimized. If the firm places 46 orders a year, what is the fixed cost per order?
A) $106.87
B) $101.15
C) $91.30
D) $87.62
E) $79.08
59) Fried Onions has total annual sales of 438,000 units, a carrying cost per unit of $2.67 per
year, and restocking costs of $48 per order. What is the EOQ?
A) 4,203 units
B) 3,824 units
C) 3,968 units
D) 4,126 units
E) 4,511 units
60) Baked Potatoes has total annual sales of 846,000 units, a carrying cost per unit of $1.64 per
year, and restocking costs of $31 per order. Each inventory item has an average cost of $2.39.
What is the average dollar value of the firm's inventory if it always orders the most economical
quantity?
A) $6,758
B) $7,008
C) $7,409
D) $6,218
E) $6,411
61) Identify several factors that affect the length of the credit period and provide an explanation
of each.
62) Green Garden is a cash-only company. The company is considering switching to a 30-day
credit policy with no discounts. What factors should the firm consider before making the switch?
63) Uptown Markets recently did an analysis of its credit policy and considered several different
options. Once the analysis was completed and reviewed, the firm adopted the most optimal
policy. The president then stated: "Now, that's done. So we don't ever have to go through that
process again." Do you agree? Justify your answer.
64) There are generally considered to be five key factors that should be evaluated when trying to
determine if a customer will pay. Write five questions that a credit manager should answer when
reviewing a credit application that would address these factors.
65) Explain how inventory is managed under an ABC inventory system.
66) Explain the purpose of a safety stock and how this relates to reorder points.
